The formation of specialized cell types from multipotential stem cells is a fundamental mystery of mammalian development. Primitive hematopoietic and endothelial cells form during the first differentiation events following implantation of the mouse embryo. An accumulating body of evidence indicates that hematopoietic and endothelial cells arise from a common progenitor, the hemangioblast, and very recently it has been demonstrated that blast colony-forming cells capable of giving rise to both lineages form not only in differentiating cultures of embryonic stem (ES) cells but also in late gastrulation stage mouse embryos. Little is known about the molecules involved in these processes. Using a novel transgenic embryo explant culture system we have shown that molecules secreted from an outer layer of primitive (visceral) endoderm (VE) are essential for activation of hematopoiesis and vasculogenesis in mesoderm. We have identified two distinct endodermal signals, bone morphogenetic protein-2 (Bmp-2) and Indian hedgehog (Ihh), each of which alone is sufficient to induce hematopoiesis and vasculogenesis and can reprogram the fate of the anterior embryo from prospective neurectoderm to hematopoietic and endothelial lineages. Another BMP family member, Bmp-4, has been shown by gene targeting to play an important early role in mesodermal patterning. Bmp-4 is expressed not in VE but in parts of the embryo adjacent to primitive endoderm; we have shown that this gene is also activated by endodermal signals. The proposed studies focus on the regulation of stem/progenitor cell commitment, characterization of the precursor(s) for hematopoietic and endothelial cells in the embryo, and analysis of their function in vivo. First, we will use embryo explant cultures and analysis of compound Bmp2/Ihh and Bmp4/Ihh mutants to elucidate the mechanism by which Bmp-2 and Bmp-4 function to activate hemato-vascular development. Second, we will directly examine the responsiveness of hematopoietic and angioblastic/endothelial stem/progenitor cells to recombinant BMPs and will determine whether their formation is compromised by Bmp-2 or Bmp-4 deficiency. Third, we will use mouse transplantation models to evaluate the functional activity and transplantation potential of wild type and Bmp2 or Bmp4 null mutant embryonic hematopoietic stem/progenitor cells cultured in the presence and absence of BMPs. These studies may have important implications for our understanding of normal hemato-vascular development and may suggest new stem cell-based therapies for hematopoietic and vascular diseases.